Classical strategy development frameworks focus on data gathering, analysis, fact-finding, followed by a deductive strategy construction approach. They are built on solid theoretical foundations, but often lack sufficient practical relevance. Strategy becomes an exercise that does not lead to the expected value creation results. Design thinking based strategy development focuses on reducing the complexity early on in the process by iteratively observing, learning, designing, and validating. Prototyping ideas, using intuition, and following an inductive approach leads to implementable results quickly. Initial results are refined until a sufficiently solid and durable strategy has been developed.
Have you ever been involved in the development or review of a business strategy? Then you are aware of the lengthy data gathering and analysis phases associated with this exercise. And have you tried to apply numerous theoretical framework that seem to work well when explained using case studies but fail to address specific practical issues at hand. Dogmatic, delivery based methodologies are indoctrinated by consultants, failing to integrate stakeholders in a participatory way into the strategy process. At worst, the results from a strategy development exercise end up as a 500+ page binder with recommendations never implemented.
Although your strategy development experience may not be that horrifying, I am sure that you can relate to some of these observations. Being an interested person by nature (and by profession), I tried to figure out why this is the case, and especially what can be done to steer strategy development toward durable success.
But let me start by describing a generic observation made when reviewing different strategy development approaches.
Two strategy development schools
Two different schools on developing corporate strategies can be identified. I call the first the process school and the second the design science school.
Process based approaches start by gathering all sorts of data about the unknown, followed by an analysis phase providing structure through synthesis. They follow the analysis pathway, shown in Figure 1, and are deductive in nature. Most universities and MBA programs, as well as the majority of academic literature on strategy, focus on process based strategy development. Examples are Porter’s five forces framework, the BCG portfolio matrix, or the St. Gallen GMN, to name just a few. These approaches are well founded in theory and have a long-standing history.
The design thinking school, which initially grew out of creative faculties, like architecture, have a more recent history. Probably the most well-known framework is Osterwalder & Pigneur’s business model canvas. Rather than being based on a theoretical foundation, design science aims at prototyping, that is, trying out new ideas, until a sufficiently sound solution, that is, strategy, has been developed. They start by introducing clarity through iteratively observing and learning, translated rapidly into prototypes. Data gathering focuses on validating the prototypes rather than fact-finding. The approach is inductive.
The key difference between design thinking and process based strategy development approaches, as shown in Figure 1, is when structure is introduced into knowledge. Design thinking follows the logic hill pathway, whereas process schools prefer the analysis pathway.
From experience, using a design thinking approach makes problem solving more tangible to practitioners. Reducing complexity early on in the process and focusing on aspects that matter most, simplifies understanding and promotes participation. Reasonable solutions are developed in a much shorter time, when compared to process based approaches. The drawback, on the other side is, that poor observing and learning capabilities may lead to missing solutions and ending up with a sub-optimal approach.
Understanding design science
Design thinking is a generic term used to describe approaches and frameworks focusing on a four step iterative process for solving problems, which I call the OLDT process.
- O – Observe the problem and generate ideas.
- L – Learn through providing structure to the observed, generating new knowledge.
- D – Design prototype solutions based on the new knowledge.
- T – Validate the prototype solutions through testing assumptions and relationships.
A key advantage of design thinking is that it allows climbing the logic hill fast, reducing complexity, and offering initial results quickly. Inefficient data gathering and analysis can be avoided without losing insight. Figure 2 shows how OLDT allows to iteratively introduce structure into complex problems without spending huge amount of efforts on fact-finding.
Design thinking based strategy development
Any good strategy, whether competitive or blue ocean, is based on a sound business model design, relying on four components
- customer needs (green),
- value proposition (red),
- tailored value chain (blue),
- sound financials (grey),
and taking into account the surrounding external environment (dark grey), as shown in Figure 3.
Design thinking supports developing new business models and associated strategies. It can also be used for reviewing and enhancing existing strategies. Although the order in which the different components of a business model are developed and / or revised is not key, I recommend iteratively apply the following eight step process:
- Observe customers, their environment, and the markets and identify unsatisfied needs. The needs may or may not be identified by the customer himself. They may even not yet exist.
- Derive a value proposition that satisfies the identified needs, focusing on alleviating the customer’s pains and creating significant gains.
- Test whether or not the value proposition designed is a fit for the identified needs. Adjust the value proposition until you are completely satisfied.
- Design a value chain relying on your capabilities around delivering the developed value proposition. Describe how the value proposition is produced and delivered, including key activities, resources, and partners.
- Validate the feasibility of the designed value chain through building and testing prototypes.
- Associate financials to your value chain for producing the developed value proposition. Identify key cost drivers and describe the proposed revenue model.
- Confirm financial soundness of the designed business model and associated strategy.
- Ideally, conclude the strategy development exercise by answering Porter’s five questions for a successful strategy.
- Using a design thinking based approach to strategy development leads to success faster than traditional process based methods.
- Data gathering and analysis should be focused on those areas that really matter in a “just-in-time” approach, avoiding spending time on irrelevant analysis.
- Business strategy developed using design science are implementable because their soundness is continuously tested and validated throughout the development process.
- Design thinking as a framework improves communication with all stakeholders because it relies on concrete practical prototypes rather than abstract theoretical frameworks.